This is just a short update on what I have been doing behind the scenes, in devising strategy for the coming year.
The key to what we do, is in the diversity of asset allocation, and keeping a closer eye on things. By being adaptable we are able to curtail what might have drifted and to reallocate to more promising areas. We can also see where some profits could be taken, and reallocate these as desired.
Since Trump was elected I took the decision to get as much input as possible, and during January I attended two big conferences, where I actually got to speak to 20 fund managers, from different sectors. What I’m looking for is the consensus view, and then I’m looking for the outliers, be they positive or negative, and then I’m looking for the risks that no one likes to talk about.
Markets remain agnostic in terms of whether they like or dislike Trump, they just look at what affect his policies could have over the next few years.
The Trump Trade or ‘reflation trade’ as it’s called gained huge momentum in November, which coincided with December’s US interest rate rise, and a more positive outlook for the US economy. This made equities do well and bonds tail off.
Markets have priced in an ‘expected future’ of lower taxes and less red tape, all of which is viewed positively for business and equities. They have also priced in two US interest rate rises during 2017, and this has had a subduing effect on bonds in general, with equities purportedly being the only game in town.
Such views though are dangerous in creating bubbles and causing more volatility, as it is not a forgone conclusion Trump will get his tax cuts, and his style of communication is already causing concern. This in itself will cause markets to sway in their opinions and increase volatility.
So the speed at which Trump is able to deliver on tax cuts may be curtailed, and if so, markets would become frustrated. In addition, markets have become wary of Trump sounding protectionist, and there are concerns that if America turns inwards, markets would become a lot more cautious.
With an expected continuation of further US rate rises this year, it has made bonds less attractive, but the UK and Europe are not likely to raise rates this year, and so they still have a place, as will inflation linked bonds.
Another view was that the reflation policies would create a volatile but overall positive equity market, but that in itself might bring forward the peak of this current cycle. There is no getting away from boom and bust politics, nor boom and bust markets. Over the last 40 years since the mid 70’s we have had recessions and stock market crashes every seven to ten years.
The stimulus policies of the post 2008 crisis have created a lull in this, and there is some complacency that this time it’s different. ( I think we’ve heard that one before ! )
Bringing these strands together, at present the equity market is buoyed by the devaluation of sterling which has helped the FTSE reach its high, and has helped the S&P reach new highs on the back of expected US tax cuts. Whilst these things can continue, as the US continues to recover, it does bring forward the prospect of more asset bubbles and more volatility.
External political risks are high this year with Article 50, and elections in the Netherlands, France and Germany, and so contingencies are more important this year.
By this I mean your personal cash buffer, to make sure you feel secure in whatever the markets may throw at us, so you don’t have to be a forced seller; and in your portfolio, an adequate buffer of cash and defensives, so we can protect the downside, and take advantage of any dips.
Fund managers always say that in the long term equities do better than bonds, but that does not stop equity markets being irrational. I would rather build our ship before the storm, so that we can successfully navigate any volatility, as we did in 2007-2009.
In summary, I’ve tried to be pragmatic and realistic about what’s on everyone’s mind, and the consensus view is that equities can continue to do well over the next two years, but there will be some considerable headwinds and volatility.
We remain optimistic over the short term, despite the issues mentioned above, due to the continued US recovery and the UK’s continued resilience as outlined by the Bank of England this week. We just have to be mindful of external factors and we will develop this further as the year unfolds.
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